Introductory Accounting: How Sirtex Is A Medical Company
ACCT 1046 Introductory Accounting
Assignment - Semester 2, 2012
Part A: The Company
Q1.
Sirtex is a Medical company that produces and distributes SIR – Spheres microspheres which are fluid medical treatments for treating liver cancer. This treatment is said ‘to target tumours with internal radiation without causing significant side effects to the normal cells around the tumour.’ (Sirtex 2011, p.2). Sirtex has created this so that it’s another way of treating liver cancer other than radiotherapy (Sirtex 2011).
Q2.
There are four members in the board of directors in Sirtex Medical Ltd:
Independent Directors:
Richard Hill – Non-executive Director, Chairman (Sirtex 2011)
Dr. John Eady – Non-executive Director, Deputy Chairman (Sirtex …show more content…
2011)
Grant Boyce – Non-executive Director (Sirtex 2011)
And one member of the Board who is non-independent:
Gilman Wong – Executive Director and Chief Executive Officer (Sirtex 2011)
Q3.
How does Sirtex account for expenditure during the research phase of a project?
Sirtex said that ‘expenditure during the research phase of a project is recognised as an expense when incurred’ (Sirtex 2011, p.31).
List all the criteria that development costs must satisfy before Sirtex capitalises (recognises as an asset) these costs.
These development costs are capitalised if ALL of the following is demonstrated: * the technical feasibility of completing the intangible asset so that it will be available for use or for sale. * the intention to complete the intangible asset and use or sell it. * the ability to use or sell the intangible asset. * the intangible asset will generate future economic benefits. * adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset are available the expenditure attributable to the intangible asset during its development can be reliably measured. (Sirtex 2011, p. 14)
What was the impact of this accounting policy on Sirtex’s 2011 statement of financial position?
Until all of the criteria is satisfied, total assets of Sirtex’s 2011 is unevaluated due to the fact that development costs that’s reported on the balance sheet isn’t recorded due to some of it might not have met the criteria.
What was the impact on Sirtex’s 2011 reported profit before tax?
They might have trouble with tax calculation later on.
Q4.
Which method of depreciation does Sirtex use to depreciate plant and equipment?
Plant and equipment is depreciated on a straight line basis which means that the depreciation amount is written off from the original cost of the asset over its expected useful life (Sirtex 2011).
What is the underlying assumption of this method in relation to the usefulness of plant and equipment?
By assuming this straight line basis method, the actual value of the plant and equipment is then inaccurate due to the fact that it is done over a formulated straight line method. To determine the actual value of the assets, this accounting method of depreciation is not a choice.
Q5.
What do the long-term provisions relate to?
Long term provisions is more or less related to the non-current liabilities of the company as Sirtex mentioned that it ‘has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured.’ (Sirtex 2011, p. 31)
What were the amounts of additional provisions AND amounts used with respect to this item in 2011?
The amount of additional provisions for the long-term is ‘$105,000’ for 2011 and for short-term is ‘$7,311,000’ for 2011. The closing balance for long-term provision total is ‘$360,000’, and a short-term provision is ‘$5,084,000’. (Sirtex 2011, p. 45)
Q6.
Describe the purpose of the external auditor’s report (that is, the Independent Auditor’s Report To the Members of Sirtex Medical Limited).
The purpose of the external auditor’s report is for the business to be able to evaluate their own company upon outsider’s views and reports of the current financial position of Sirtex for more accurate and non-bias point of view.
Name the audit firm engaged by Sirtex in 2011.
The audit firm engaged by Sirtex in 2011 is the Grant Thomton Audit Pty Ltd.
Did Sirtex receive a qualified or an unqualified audit report in 2011?
According to Grant Thomton Audit Pty Ltd, Sirtex received a qualified audit report in 2011 as they have complied with section 300A of the Corporations Act 2001 ( Grant Thomton Audit Pty Ltd 2011).
Q7.
What was the amount of cash receipts from customers in 2011?
Cash receipts from customers in 2011 according to Sirtex’s statement of cash flows 2011 is $69,043,000 (Sirtex 2011, p. 30)
Why does this amount differ from the 2011 sales revenue figure?
Sales revenue figure includes all the sales to customers while cash receipts is only cash received and some of the revenues are also credit sales as well.
Part B: Analysis of financial information
Q.1
Using the consolidated figures for Sirtex Medical Ltd, calculate the following ratios for the years 2010 and 2011. Ratios are to be shown at one decimal place. You must show all your workings. (Where no workings are shown you will receive zero for this section):
Current ratio (Current asset / Current liabilities = Current Ratio) | 2010 | 2011 | Current Assets | $58,608,000 | $59,572,000 | Current Liabilities | $13,667,000 | $14,654,000 | CR | 4.3 | 4.1 |
Acid test ratio ((Current assets – Inventory) / Current Liabilities = Acid test ratio) | 2010 | 2011 | Current Assets - Inventory | $58,608,000 - $957,000 | $59,572,000 - $1,025,000 | Current Liabilities | $13,667,000 | $14,654,000 | ATR | 4.2 | 4 |
Average inventory turnover (days) ((Average Inventories / Cost of Sales) x 365 = AIT Days) | 2010 | 2011 | Average Inventories (Starting+Ending)/2 | ($1,399,000 + $957,000) / 2= $1,178,000 | ($957,000 + $1,025,000) / 2=$991,000 | Cost of Sales | $10,826,000 | $13,543,000 | AIT | 40 | 25 |
Return on assets ((Net Income / Average Assets) x 100 = %) | 2010 | 2011 | Net Income (Profit before income tax) | $19,103,000 | $14,350,000 | Average Assets (Starting+Ending)/2 | ($49,923,000+$66,660,000)/2=$58,291,500 | ($66,660,000+$76,641,000)/2=$71,650,500 | ROA | 32.8% | 20% |
Gross profit margin ((Gross Profit / Sales Revenue) x 100 = %) | 2010 | 2011 | Gross Profit | $53,507,000 | $56,743,000 | Sales Revenue | $64,333,000 | $70,286,000 | GPM | 83.2% | 80.7% |
Net profit margin ((Net Income / Sales Revenue) x 100 = %) | 2010 | 2011 | Net Income (Profit before income tax) | $19,103,000 | $14,350,000 | Sales Revenue | $64,333,000 | $70,286,000 | NPM | 29.7% | 20.4% |
Q2 COMPANY X | Ratio | 2010 | 2011 | Current ratio | 4.1 | 4.3 | Acid test ratio | 3.3 | 2.6 | Average inventory turnover (days) | 36 | 43 | Return on assets | 33.0% | 20.1% | Gross profit margin | 83.3% | 78.1% | Net profit margin | 29.5% | 28.8% |
Sirtex | Ratio | 2010 | 2011 | Current ratio | 4.3 | 4.1 | Acid test ratio | 4.2 | 4 | Average inventory turnover (days) | 40 | 25 | Return on assets | 32.8% | 20% | Gross profit margin | 83.2% | 80.7% | Net profit margin | 29.7% | 20.4% |
Description of the movement in each of the ratios for Sirtex and an explanation of what this movement tell you about Sirtex.
Current ratio:
This ratio measures liquidity of the business.
Comparing the year 2010 to 2011, the ratio has decreased which means that the dollar amount of current assets per dollar of liability is lower (Birt et al. 2010). According to Birt et al. (2010), having a high current ratio means that the business has excess investments to unprofitable assets – cash, receivables, and inventory. The decrease in ratio means now that they are trying to make use of these unprofitable assets by increasing their liability, though their ability to meet short term financial debt is met (above 1) which means that their liquidity is in a good position.
Acid test ratio:
According to Birt et al. (2010), acid test ratio measures the liquidity of the business. The value of the acid test ratio of 4.2 allows the business to meet its short term obligations as needed and so they are in a good position. Their decrease in the acid test ratio could mean that they are trying to make use of the unprofitable assets, not leaving the ratio too high for higher liquidity.
Average inventory turnover:
This value measures how fast stock (inventory) is turned into cash. The lower of this value means higher profitability so Sirtex has decided to lower this value for higher profit and faster inventory …show more content…
clearing.
Return on assets:
Return on assets value shows how much revenue the company is generating over their assets. This shows how effectively profitable the business is. The higher the percentage the more profitable but for Sirtex, they have a lower percentage from 2010 to 2011. This could mean that the business has invested more into assets for more future economic benefit during the year 2011 causing their ROA percentage to lower or they simply aren’t generating enough revenue to match with the generating of their total assets, ending with them having lower profitability.
Gross Profit Margin:
According to Birt et al. (2010), this value measures profitability upon how much of total gross profit they generate upon sales revenue. The higher the value means higher profit generated, lower means lower profit generation. From 2010 to 2011 the margin has lowered meaning they have lowered the mark up. This means that they are trying to generate more sales with the lowered price of their items sales to increase their profitability.
Net Profit Margin:
Net profit margin measures profitability as to how much of net income they generates upon their total sales revenue. The higher value means more profit or fewer expenses, lower value means less profit or higher expenses. From the year 2010 to 2011, the net profit margin has lowered meaning they have a lower net profit due to the fact that they have reduced their gross profit margin (mark up), or it could have been that they have an increased in expenses during the year 2011. Overall their profitability was lowered but this movement is probably taking its adaption to the new mark-up prices.
Description of the movement in each of the ratios for Company X and an explanation of what this movement tell you about Company X.
Current ratio:
According to their current ratio, they have had an increase in current ratio from 2010 to 2011. This movement could mean that they are keeping their ratio higher for higher liquidity.
Acid test ratio:
Looking back to the current ratio, meaning that they have invested more in buying more inventory which has increased their current ratio but their acid test ratio have been lower due to them having more inventory. Overall this has decreased their liquidity.
Average inventory turnover:
Higher inventory turnover from 2010 to 2011 but not too much of an increase, this could mean their sales method is somehow out-dated or they are having trouble selling their stock. Overall their liquidity has lowered.
Return on assets:
Similar to Sirtex, Company X may have invested more in assets causing their ROA percentage to lower meaning lowering their profitability.
Gross Profit Margin:
Their GPM is similar to Sirtex though they have had a bigger lower mark-up.
Net Profit Margin:
Unlike Sirtex, company X doesn’t have that much change in net profit margin meaning they are managing well their expenses and profits, adapting well with their lower gross profit margin.
Q3.
If I was to consider becoming a creditor to one of these 2 companies, I would choose Sirtex due to them having a better Average Inventory Turnover figure as they could manage their sales well, resulting in faster sales of stock, therefore they could be able to pay their credit faster as they would get a faster turnover for them as well.
Q4.
I would consider purchasing shares from Company X over Sirtex due to them having a better overall liquidity and profitability according to their figures from above. Looking at liquidity, comparing current ratio, and the two companies values are quite similar as well as their changes values, though Sirtex is managing their current ratio heading to a better position in managing assets to liability. The acid test ratio though is looking better for company X as they seem to be managing well in their liquidity allowing a balance from quick assets to liability, allowing more effective development to the company.
On to comparing profitability.
Sirtex has a better average inventory turnover over Company X, this puts them on a better profitability if we only look at the AIT itself, but considering the ROA, GPM similarities from the company, it only comes down to the net profit margin and company X shows that they are doing a great job in maintaining their net profit over sales while Sirtex has shown a big reduction in the net profit margin. This puts Company X on a better position comparing to Sirtex and this is the big reason why I’d choose Company X over Sirtex.
Reference List
Birt, J, Chalmers, K, Byrne, S, Brooks, A & Oliver, J 2010, Accounting: Business reporting for decision making, 3rd edn, John Wiley & Sons Australia, Ltd, Milton, QLD.
Telstra 2007, $3 million up for grabs to bring older Australians into technical age, Telstra, Australia, viewed 15th August 2007,
<http://www.telstra.com.au/abouttelstra/csr/stories_article.cfm?ObjectID=40297>.
Sirtex 2012, Sirtex Annual Report 2011, Sirtex, Australia, viewed 9th September 2012,
<http://www.sirtex.com/files/Sirtex_Annual_Report_2011.pdf>.
Assignment - Semester 2, 2012
Part A: The Company
Q1.
Sirtex is a Medical company that produces and distributes SIR – Spheres microspheres which are fluid medical treatments for treating liver cancer. This treatment is said ‘to target tumours with internal radiation without causing significant side effects to the normal cells around the tumour.’ (Sirtex 2011, p.2). Sirtex has created this so that it’s another way of treating liver cancer other than radiotherapy (Sirtex 2011).
Q2.
There are four members in the board of directors in Sirtex Medical Ltd:
Independent Directors:
Richard Hill – Non-executive Director, Chairman (Sirtex 2011)
Dr. John Eady – Non-executive Director, Deputy Chairman (Sirtex …show more content…
2011)
Grant Boyce – Non-executive Director (Sirtex 2011)
And one member of the Board who is non-independent:
Gilman Wong – Executive Director and Chief Executive Officer (Sirtex 2011)
Q3.
How does Sirtex account for expenditure during the research phase of a project?
Sirtex said that ‘expenditure during the research phase of a project is recognised as an expense when incurred’ (Sirtex 2011, p.31).
List all the criteria that development costs must satisfy before Sirtex capitalises (recognises as an asset) these costs.
These development costs are capitalised if ALL of the following is demonstrated: * the technical feasibility of completing the intangible asset so that it will be available for use or for sale. * the intention to complete the intangible asset and use or sell it. * the ability to use or sell the intangible asset. * the intangible asset will generate future economic benefits. * adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset are available the expenditure attributable to the intangible asset during its development can be reliably measured. (Sirtex 2011, p. 14)
What was the impact of this accounting policy on Sirtex’s 2011 statement of financial position?
Until all of the criteria is satisfied, total assets of Sirtex’s 2011 is unevaluated due to the fact that development costs that’s reported on the balance sheet isn’t recorded due to some of it might not have met the criteria.
What was the impact on Sirtex’s 2011 reported profit before tax?
They might have trouble with tax calculation later on.
Q4.
Which method of depreciation does Sirtex use to depreciate plant and equipment?
Plant and equipment is depreciated on a straight line basis which means that the depreciation amount is written off from the original cost of the asset over its expected useful life (Sirtex 2011).
What is the underlying assumption of this method in relation to the usefulness of plant and equipment?
By assuming this straight line basis method, the actual value of the plant and equipment is then inaccurate due to the fact that it is done over a formulated straight line method. To determine the actual value of the assets, this accounting method of depreciation is not a choice.
Q5.
What do the long-term provisions relate to?
Long term provisions is more or less related to the non-current liabilities of the company as Sirtex mentioned that it ‘has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured.’ (Sirtex 2011, p. 31)
What were the amounts of additional provisions AND amounts used with respect to this item in 2011?
The amount of additional provisions for the long-term is ‘$105,000’ for 2011 and for short-term is ‘$7,311,000’ for 2011. The closing balance for long-term provision total is ‘$360,000’, and a short-term provision is ‘$5,084,000’. (Sirtex 2011, p. 45)
Q6.
Describe the purpose of the external auditor’s report (that is, the Independent Auditor’s Report To the Members of Sirtex Medical Limited).
The purpose of the external auditor’s report is for the business to be able to evaluate their own company upon outsider’s views and reports of the current financial position of Sirtex for more accurate and non-bias point of view.
Name the audit firm engaged by Sirtex in 2011.
The audit firm engaged by Sirtex in 2011 is the Grant Thomton Audit Pty Ltd.
Did Sirtex receive a qualified or an unqualified audit report in 2011?
According to Grant Thomton Audit Pty Ltd, Sirtex received a qualified audit report in 2011 as they have complied with section 300A of the Corporations Act 2001 ( Grant Thomton Audit Pty Ltd 2011).
Q7.
What was the amount of cash receipts from customers in 2011?
Cash receipts from customers in 2011 according to Sirtex’s statement of cash flows 2011 is $69,043,000 (Sirtex 2011, p. 30)
Why does this amount differ from the 2011 sales revenue figure?
Sales revenue figure includes all the sales to customers while cash receipts is only cash received and some of the revenues are also credit sales as well.
Part B: Analysis of financial information
Q.1
Using the consolidated figures for Sirtex Medical Ltd, calculate the following ratios for the years 2010 and 2011. Ratios are to be shown at one decimal place. You must show all your workings. (Where no workings are shown you will receive zero for this section):
Current ratio (Current asset / Current liabilities = Current Ratio) | 2010 | 2011 | Current Assets | $58,608,000 | $59,572,000 | Current Liabilities | $13,667,000 | $14,654,000 | CR | 4.3 | 4.1 |
Acid test ratio ((Current assets – Inventory) / Current Liabilities = Acid test ratio) | 2010 | 2011 | Current Assets - Inventory | $58,608,000 - $957,000 | $59,572,000 - $1,025,000 | Current Liabilities | $13,667,000 | $14,654,000 | ATR | 4.2 | 4 |
Average inventory turnover (days) ((Average Inventories / Cost of Sales) x 365 = AIT Days) | 2010 | 2011 | Average Inventories (Starting+Ending)/2 | ($1,399,000 + $957,000) / 2= $1,178,000 | ($957,000 + $1,025,000) / 2=$991,000 | Cost of Sales | $10,826,000 | $13,543,000 | AIT | 40 | 25 |
Return on assets ((Net Income / Average Assets) x 100 = %) | 2010 | 2011 | Net Income (Profit before income tax) | $19,103,000 | $14,350,000 | Average Assets (Starting+Ending)/2 | ($49,923,000+$66,660,000)/2=$58,291,500 | ($66,660,000+$76,641,000)/2=$71,650,500 | ROA | 32.8% | 20% |
Gross profit margin ((Gross Profit / Sales Revenue) x 100 = %) | 2010 | 2011 | Gross Profit | $53,507,000 | $56,743,000 | Sales Revenue | $64,333,000 | $70,286,000 | GPM | 83.2% | 80.7% |
Net profit margin ((Net Income / Sales Revenue) x 100 = %) | 2010 | 2011 | Net Income (Profit before income tax) | $19,103,000 | $14,350,000 | Sales Revenue | $64,333,000 | $70,286,000 | NPM | 29.7% | 20.4% |
Q2 COMPANY X | Ratio | 2010 | 2011 | Current ratio | 4.1 | 4.3 | Acid test ratio | 3.3 | 2.6 | Average inventory turnover (days) | 36 | 43 | Return on assets | 33.0% | 20.1% | Gross profit margin | 83.3% | 78.1% | Net profit margin | 29.5% | 28.8% |
Sirtex | Ratio | 2010 | 2011 | Current ratio | 4.3 | 4.1 | Acid test ratio | 4.2 | 4 | Average inventory turnover (days) | 40 | 25 | Return on assets | 32.8% | 20% | Gross profit margin | 83.2% | 80.7% | Net profit margin | 29.7% | 20.4% |
Description of the movement in each of the ratios for Sirtex and an explanation of what this movement tell you about Sirtex.
Current ratio:
This ratio measures liquidity of the business.
Comparing the year 2010 to 2011, the ratio has decreased which means that the dollar amount of current assets per dollar of liability is lower (Birt et al. 2010). According to Birt et al. (2010), having a high current ratio means that the business has excess investments to unprofitable assets – cash, receivables, and inventory. The decrease in ratio means now that they are trying to make use of these unprofitable assets by increasing their liability, though their ability to meet short term financial debt is met (above 1) which means that their liquidity is in a good position.
Acid test ratio:
According to Birt et al. (2010), acid test ratio measures the liquidity of the business. The value of the acid test ratio of 4.2 allows the business to meet its short term obligations as needed and so they are in a good position. Their decrease in the acid test ratio could mean that they are trying to make use of the unprofitable assets, not leaving the ratio too high for higher liquidity.
Average inventory turnover:
This value measures how fast stock (inventory) is turned into cash. The lower of this value means higher profitability so Sirtex has decided to lower this value for higher profit and faster inventory …show more content…
clearing.
Return on assets:
Return on assets value shows how much revenue the company is generating over their assets. This shows how effectively profitable the business is. The higher the percentage the more profitable but for Sirtex, they have a lower percentage from 2010 to 2011. This could mean that the business has invested more into assets for more future economic benefit during the year 2011 causing their ROA percentage to lower or they simply aren’t generating enough revenue to match with the generating of their total assets, ending with them having lower profitability.
Gross Profit Margin:
According to Birt et al. (2010), this value measures profitability upon how much of total gross profit they generate upon sales revenue. The higher the value means higher profit generated, lower means lower profit generation. From 2010 to 2011 the margin has lowered meaning they have lowered the mark up. This means that they are trying to generate more sales with the lowered price of their items sales to increase their profitability.
Net Profit Margin:
Net profit margin measures profitability as to how much of net income they generates upon their total sales revenue. The higher value means more profit or fewer expenses, lower value means less profit or higher expenses. From the year 2010 to 2011, the net profit margin has lowered meaning they have a lower net profit due to the fact that they have reduced their gross profit margin (mark up), or it could have been that they have an increased in expenses during the year 2011. Overall their profitability was lowered but this movement is probably taking its adaption to the new mark-up prices.
Description of the movement in each of the ratios for Company X and an explanation of what this movement tell you about Company X.
Current ratio:
According to their current ratio, they have had an increase in current ratio from 2010 to 2011. This movement could mean that they are keeping their ratio higher for higher liquidity.
Acid test ratio:
Looking back to the current ratio, meaning that they have invested more in buying more inventory which has increased their current ratio but their acid test ratio have been lower due to them having more inventory. Overall this has decreased their liquidity.
Average inventory turnover:
Higher inventory turnover from 2010 to 2011 but not too much of an increase, this could mean their sales method is somehow out-dated or they are having trouble selling their stock. Overall their liquidity has lowered.
Return on assets:
Similar to Sirtex, Company X may have invested more in assets causing their ROA percentage to lower meaning lowering their profitability.
Gross Profit Margin:
Their GPM is similar to Sirtex though they have had a bigger lower mark-up.
Net Profit Margin:
Unlike Sirtex, company X doesn’t have that much change in net profit margin meaning they are managing well their expenses and profits, adapting well with their lower gross profit margin.
Q3.
If I was to consider becoming a creditor to one of these 2 companies, I would choose Sirtex due to them having a better Average Inventory Turnover figure as they could manage their sales well, resulting in faster sales of stock, therefore they could be able to pay their credit faster as they would get a faster turnover for them as well.
Q4.
I would consider purchasing shares from Company X over Sirtex due to them having a better overall liquidity and profitability according to their figures from above. Looking at liquidity, comparing current ratio, and the two companies values are quite similar as well as their changes values, though Sirtex is managing their current ratio heading to a better position in managing assets to liability. The acid test ratio though is looking better for company X as they seem to be managing well in their liquidity allowing a balance from quick assets to liability, allowing more effective development to the company.
On to comparing profitability.
Sirtex has a better average inventory turnover over Company X, this puts them on a better profitability if we only look at the AIT itself, but considering the ROA, GPM similarities from the company, it only comes down to the net profit margin and company X shows that they are doing a great job in maintaining their net profit over sales while Sirtex has shown a big reduction in the net profit margin. This puts Company X on a better position comparing to Sirtex and this is the big reason why I’d choose Company X over Sirtex.
Reference List
Birt, J, Chalmers, K, Byrne, S, Brooks, A & Oliver, J 2010, Accounting: Business reporting for decision making, 3rd edn, John Wiley & Sons Australia, Ltd, Milton, QLD.
Telstra 2007, $3 million up for grabs to bring older Australians into technical age, Telstra, Australia, viewed 15th August 2007,
<http://www.telstra.com.au/abouttelstra/csr/stories_article.cfm?ObjectID=40297>.
Sirtex 2012, Sirtex Annual Report 2011, Sirtex, Australia, viewed 9th September 2012,
<http://www.sirtex.com/files/Sirtex_Annual_Report_2011.pdf>.